Solid investor appetite for Tsui Wah IPO

The iconic Hong Kong restaurant chain prices its offering at the top to raise $98 million.
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Tsui Wah's flagship Lan Kwi Fong branch (Epicurious)
<div style="text-align: left;"> Tsui Wah's flagship Lan Kwi Fong branch (Epicurious) </div>

If you have ever been drinking in Hong Kong’s central Lan Kwai Fong entertainment district after midnight, chances are that you may also have visited Tsui Wah restaurant for a late meal — or an early breakfast, if you prefer to look at it that way.

The popular restaurant, which is open 24 hours and serves a late dinner until 7am, is part of Hong Kong’s leading chain of cha chaan teng restaurants (informal eateries similar to a cafe or diner) and has been catering to hungry Hong Kongers since 1967. By now, the company has 21 outlets spread across the territory, as well as four in mainland China and one in Macau, but the one in Lan Kwai Fong is probably the most well-known, especially among expats, tourists and other occasional visitors to Hong Kong.

And now you can get a taste of this iconic Hong Kong brand in the stock market as well. Tsui Wah Holdings will start trading on the local bourse next Monday (November 26) after raising HK$756.7 million ($98 million) from an initial public offering. The deal, which closed on Monday after a week of bookbuilding, was well-received both by institutions and retail investors and a source said yesterday that the price would be fixed at the top of the indicated range.

The deal was supported by two Chinese private equity firms — Capital Today and Prax Capital — which came in as cornerstone investors, buying $10 million worth of shares each. As an indication of their confidence in the company’s long-term outlook, they have also agreed to a 12-month lock-up, which is unusually long in the current market environment where investors remain concerned about market volatility. Many Hong Kong IPOs this year have also traded poorly in the aftermarket, making investors cautious about accepting lockups at all.

However, food and beverage has remained one of the more popular sectors with investors this year and Tsui Wah’s position as the leading player in the fast-growing Cha Chaan Teng segment of the market, both in terms of revenues and the number of seats, did make it an attractive proposition.

According to a research report, Cha Chaan Teng is the biggest and fastest growing segment of the casual dining business in Hong Kong where many locals visit fast-food outlets and other casual eateries as part of their daily routine. Cha Chaan Teng restaurants differ from fast-food places in that the food is cooked to order, although the seat turnover is still high. Frost & Sullivan expects sales at Cha Chaan Teng restaurants to grow at a compound annual growth rate of 8.1% between 2012 and 2016.

By combining traditional Cantonese food with elements of both Asian and Western fare, Cha Chaan Teng restaurants have created a unique Hong Kong-style cuisine that is also popular with tourists. Spending on dining by one-day visitors to the city increased to HK$1.5 billion in 2011 from $240 million in 2001, while spending by over-night visitors increased to HK$18.7 billion from HK$5.7 billion in the same 10-year period, Frost & Sullivan data show

Tsui Wah is benefitting from these trends and is planning to open four to five new outlets in Hong Kong in each of the fiscal years until March 2015, to reach 32 stores by the end of that period. It will also accelerate its expansion in mainland China where it opened its first restaurant in 2009 and by March 2015 it is aiming to have a total of more than 50 outlets across its three markets.

To support this expansion, the company plans to set up a second central kitchen in Hong Kong and to open its first central kitchen in China (in Shanghai) in the fiscal year to March 2014 and a second one in southern China in the following 12 months.

The research report projects Tsui Wah’s overall sales and net profit to grow at a Cagr of close to 39% in 2012 to 2015, with sales reaching HK$2 billion in 2015 and net profit growing to HK$277 million in the same year.

The deal was fully covered on the first day and the institutional tranche, which accounted for 90%, was multiple times subscribed at the end of the one-week bookbuilding, the source said. The demand was said to be high quality and the buyers included high-conviction accounts that had done a lot of work on the company, as well as traditional long-only institutions and hedge funds. The demand came from Asia, Europe, the US and the Middle East.

Retail investors were also pretty keen, although the subscription ratio wasn’t high enough to trigger a clawback. For that to happen, the 10% retail tranche would have had to be at least 15 times covered. The official subscription ratio hadn’t been made official as of yesterday evening, but sources indicated that it was just under 10 times.

The price was fixed at the top of the HK$1.89 to HK$2.27 range, which translates into a valuation of 15.8 times (post-shoe) the projected earnings for calendar 2013. That represents a sizeable discount to other Hong Kong-listed restaurant chains such as Café de Coral and Ajisen, which as of yesterday were trading at 24.9 times and 27.1 times respectively, according to Bloomberg data.

Tsui Wah sold approximately 333.3 million shares, or 15% of the company. There is also a 15% greenshoe that may increase the total deal size to $112 million.

The company was set up in 1989 when a group of five chefs who had been working together at the Tsui Wah restaurant in San Po Kong, which dates back to 1967, joined together and took over the place from the original owner, who was leaving Hong Kong. They acquired a second restaurant in 1990 and have continued to expand ever since. The restaurant in Lang Kwai Fong was opened in 1998. The five original founders are still active as executive directors and controlling shareholders, making this a true Hong Kong entrepreneurial story.

Deutsche Bank was the sole bookrunner for the IPO.

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